Targeting Apple

At a Senate committee hearing on Tuesday, federal lawmakers hauled in America’s most successful corporation to investigate why it had so precisely followed the laws those solons have passed.

The targeting of Apple should be no particular surprise, in Congress’s crass calculus: True, even if reducing one’s tax burden and shifting profits overseas were a crime, Apple would probably not be the first company to investigate for such behavior — as chief executive Tim Cook pointed out, Apple paid $6 billion in corporate income taxes to the U.S. Treasury in 2012, which is enough to run the entire Transportation Security Administration and amounts to about one dollar of every 40 that the corporate income tax collects. But Apple is America’s richest and most successful corporation, and thus the fattest goose to drag before a committee.

Senator Carl Levin (D., Mich.), chairman of the committee, called Apple to account for its practice of locating subsidiaries and activities abroad in low-tax jurisdictions. It is indeed a problem that U.S. corporations shift much of their income elsewhere and leave it there. But corporations do this because Congress has encouraged them to.

Other developed nations have “territorial” tax systems, in which income earned within a country’s borders is taxed there. In contrast, the U.S. taxes all income earned by its corporations worldwide — but collects these taxes only when corporations bring their profits home. In addition, Congress has set the rate at the highest level in the industrialized world, 35 percent.

Congress should not be surprised, therefore, that Apple goes to great lengths to earn its income elsewhere. The sheer complication of the U.S. tax code — again, Congress’s handiwork — aids the company in this regard. Smaller firms, of course, lack Apple’s tax-planning and income-sluicing capabilities and are generally not able to do this; companies with less market power and intellectual property than Apple also find it harder to reduce their tax burden legally.

The congressional hearing convened this week proposed no solutions to these problems, and certainly not the right one: a lower corporate tax rate and a territorial taxation system, which would primarily benefit not the American fisc but the American worker. With a competitive corporate tax rate, companies would choose to locate their operations here rather than abroad. Instead, Senator Levin and other Democrats propose to reinforce and expand a system that does not work; they suggest various ways of closing tax exclusions and preventing companies from moving income elsewhere.

Congress has in the past come up with other approaches for the huge amounts of cash (in total, almost $2 trillion) held by corporations’ overseas subsidiaries: In 2004, legislators passed and President Bush signed a temporary holiday with a much lower tax rate on corporate income returned to U.S. entities. It is widely considered to have been a complete failure; the repatriation of all this cash generated almost no revenue or investment, essentially adding up to a lightly taxed giveaway to stockholders. Whether multinational corporations’ earnings have yet been legally admitted to the U.S. is, in effect, irrelevant to the question of whether corporations can use this money to invest in new lines of business and pay dividends to shareholders. Apple demonstrated that clearly this spring, when it decided to pay out some of its huge cash holdings to U.S. stockholders but did so by borrowing against its foreign subsidiaries.

The proper solution, again, is to create a territorial taxation system and reduce the corporate tax rate. While Apple broadly endorsed this kind of reform in its report to Congress, such a shift will not hugely benefit multinational corporations, because the advantages they gain with their elaborate accounting operations will be diminished.

Senator Rand Paul said following the hearing that Congress “should apologize to Apple” and should itself “be on trial here for creating a byzantine and bizarre tax code.” He is just about right: Congress owes an apology to Apple for calling it before a star-chamber subcommittee, but a more serious one to the American people, for the tax code that hurts them more than it does Apple.